By James Davey
LONDON (Reuters) - Europe's largest single-price retailer Poundland (L:PLND) has snapped up smaller and struggling British rival 99p Stores, seeking to speed up its already rapid expansion.
Poundland shares rose up to 10.3 percent on Friday after it said it had agreed to pay 55 million pounds ($84 million) to 99p Stores' owners, the Lalani family.
The purchase will add 251 stores to Poundland's existing 534 UK stores. It also has 39 shops in Ireland and a five-store trial in Spain under the Dealz name.
With recession-era shopping habits entrenched, discount retailers, both in general merchandise and food, are winning market share across the industry.
However, while Poundland, which joined the London Stock Exchange in March last year, has thrived, 99p Stores has struggled, making core earnings of 6.1 million pounds on sales of 370.4 million pounds in the year to Feb. 2014.
In November Poundland posted first half earnings 12.6 million pounds on sales of 528.2 million pounds.
Poundland CEO Jim McCarthy denied the transaction represented a distressed sale by the Lalanis, saying the deal made sense for both parties.
"The vendors recognised that sometimes you need to move the business on to develop it," he told Reuters.
"Poundland has a business and a proposition which is superior to 99p Stores, they recognise that value can be created from a combination of the two."
McCarthy said the 99p Stores name would eventually disappear as its stores would be converted to the Poundland fascia.
In its 2014-15 year so far Poundland has opened a net 45 stores in the UK and Ireland. It plans a net 60 over the full year, the same next year and prior to the 99p Stores deal saw scope for about 1000 UK stores.
McCarthy said the transaction would not affect its existing store opening plans.
Shares in Poundland, which listed at 300 pence, were up 36 pence at 393.5 pence at 1023 GMT, valuing the business at 975 million pounds.
"Poundland should be able to generate buying synergies and make the 99p stores more profitable," said analysts at Jefferies, who have an 'underperform' rating on the stock.
"However adding circa 250 stores in one go is a big step for Poundland and could lead to significant cannibilisation."
Poundland will pay cash of 47.5 million pounds and new shares worth 7.5 million pounds, subject to the approval of competition authorities. It forecast the deal would be earnings enhancing once 99p Stores had been fully integrated.
It will fund the cash portion and the cost of integrating 99p Stores through an equity placing and an increase in its banking facilities.
